SHRADDHA JAIN,DELHI vs. ITO, NEW DELHI

ORDER PER C.M.Garg, J.M.

This appeal has been preferred by the assessee directed against the order of the CIT(A)-XVI, New Delhi dated 17.03.2015 passed in first appeal no. 42/2012-13 for AY 2004-05.

by the assessee in this appeal read as under :

1. Whether the Ld. CIT(A) was justified in upholding the Assumption of jurisdiction without proper appreciating the submission in the following manner that :-. 1(a) where the Ld. AO invoked Sec. 147 / 148 just based on general & mass in nature information even neither it was not based upon an 2 Shraddha Jain iota of evidence nor was any tangible evidence brought on record to substantiate the information into reasons 1(b) by not disposing the objection on the issue of jurisdiction as raised. 1(c) by treating the details filed during Assessment proceedings as equaling and sufficient material for invoking sec. 147/148.

2. Whether the Ld. CIT(A) was justified by upholding the addition on a/c of gift of Rs. 501000/- u/s 68 without properly considering the evidence on record or any contrary material on record to draw any adverse inference.

3. Whether the Ld. CIT(A) was justified by not adjudicating upon Ground no. 2 i.e. addition of Rs. 25050/- made by the AO on a/c of the above alleged gift just on surmises and conjectures.”

Legal Ground nos. 1 to 1(c) of the assessee

3 Shraddha Jain jurisdiction just on a piece of information without fulfilling ingredients and requirements u/s 147/148 of the Act.

7. Further, from above it is apparent that the AO has simply relied on the list of so called beneficiaries and noted that as the assessee also appear in the list and without any verification from the assessment records of the assessee for AY 2004-05 proceeded to issue notice u/s 148 of the Act in a mechanical manner even without mentioning details of so called alleged entry and its nature. On vigilant reading of reasons recorded, as reproduced it is vivid that the AO proceeded to issue notice only on the basis of vague information which was a list of so called beneficiaries without any verification, examination or application of mind to the details and information received.

Beneficiary’ Beneficiary’s Beneficiary’ Value Instrumen Date Name of Bank Branc A/c. s Bank name s Of entry t no by on account from h of no. Name Bank branch taken which which holder of whic entry entry entry entry entry h giving giving taken taken giving entry bank accoun account given t G&G STATE KAROL 500,00 8603 8603 Shubham SBH KB 50038 PHARMA BANK OF BAGH 10.2.0 0 Electronic (INDIA) HYDERABA 3 s and LTD. D Electronic . s G&G STATE KAROL 500,00 10373 10.2.0 Garner SBH KB 50029 PHARMA BANK OF BAGH 3 0 Finance & (INDIA) HYDERABA Security LTD. D . G&G STATE KAROL 500,00 11112 10.2.0 Garner SBH KB 50030 PHARMA BANK OF BAGH 3 0 Finance & (INDIA) HYDERABA Security LTD. D . G&G STATE KAROL 500,00 12302 10.2.0 Garner SBH KB 50025 PHARMA BANK OF BAGH 3 0 Finance & (INDIA) HYDERABA Security LTD. D .

The above amount of Rs. 20,00,000/- has been creditedinto assesses's bank account on various dates.Investigation made by the investigation Wing of the Department has found that assesse is a beneficiary ofITA NO. 3149/Del/2013 6taking the aforesaid accommodation entries. L have also perused various materials and report from Investigation Wing and on that basis it is evident that the assesse company has introduced its own unaccounted money in its bank account by way of above accommodation entries. Therefore, I have reasons to believe that the income of the assessee company amounting to Rs 20,00,0001- has escaped assessment. The escapement of income has been clearly on account of failure on the part of the assesse company to truly and fully disclosed all 6 Shraddha Jain material facts necessary for assessment thus, it is fit case for initiation of proceedings u/s 147 of the income tax act,1961."

8. We have perused the aforesaid reasons recorded by the AO for reopening the assessment in dispute and we are of the considered view that the AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. A mere reference is made to certain information received from the Investigation Wing which was supplied to the assessee vide AO’s letter dated 15.9.2010. In our view the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO had mechanically issued notices u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Investigation, Jhandewalan, New Delhi. Keeping in view of the facts and circumstances of the present case and the law applicable in the of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt. year in dispute is bad in law and deserves to be quashed. We draw our support from the judgments of the Hon’ble High Court of Delhi in the following cases:- (a) Signature Hotels (P)_ Ltd. vs. ITO and another reported in 338 ITR 51 (Del) has under similar circumstances as follows:- “For the A.Y. 2003-04, the return of income of the assessee company was accepted u/s.143(1) of the Income-tax Act, 1961 and was not selected for scrutiny. Subsequently, the Assessing Officer issued notice u/s.148 which was objected by the assessee. The Assessing Officer rejected the objections. The assessee company filed writ petition and challenged the notice and the order on objections. The Delhi High Court allowed the writ petition and held as under: “(i) Section 147 of the Income-tax Act, 1961, is wide but not plenary. The Assessing Officer must have ‘reason to believe’ that income chargeable to tax has escaped assessment. This is mandatory and the ‘reason to believe’ are required to be recorded in writing by the Assessing Officer. (ii) A notice u/s.148 can be quashed if the ‘belief’ is not bona fide, or one based on vague, irrelevant and nonspecific information. The basis of the belief should be ITA NO. 3149/Del/2013 8 discernible from the material on record, which was available with the Assessing Officer, when he recorded the reasons. There should be a link between the reasons and the evidence/material available with the Assessing Officer. (iii) The reassessment proceedings were initiated on the basis of information received from the Director of Income-tax (Investigation) that the petitioner had 7 Shraddha Jain introduced money amounting to Rs.5 lakhs during F.Y. 2002-03 as stated in the annexure. According to the information, the amount received from a company, S, was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not indicate escapement of income. (iv) Further, the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, had a paid up capital of Rs.90 lakhs and was incorporated on January 4, 1989, and was also allotted a permanent account number in September 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to the quashed.” (b). In the case of CIT vs. Atul Jain reported in 299 ITR 383 it has been held as under:- 9 “Held, dismissing the appeals, that the only information was that the assessee had taken a bogus entry of capital gains by paying cash along with some premium for taking a cheque for that amount. The information did not indicate the source of the capital gains which in this case were shares. There was no information which shares had been transferred and with whom the transaction had taken place. The AO did not verify the correctness of information received by him but merely accepted the truth of the vague information in a mechanical manner. The AO had not even recorded his satisfaction about the correctness or otherwise of the information for issuing a notice u/s 148. What had been recorded by the AO as his “reasons to believe”was nothing more than a report given by him to the Commissioner. The submission of the report was not the same as recording of reasons to believe for issuing a notice. The AO had clearly substituted form for substance and therefore the action of the AO was not sustainable.”

9. In view of above, we are of the considered view that above issue is exactly the similar to the issue involved in the present appeal and is squarely covered by the aforesaid decisions of the Hon’ble High Court of Delhi. Hence, respectfully following the ITA NO. 3149/Del/2013 10 above precedent, we decide the legal issue in dispute in favor of the Assessee and against the Revenue and accordingly quash the reassessment proceedings.

8 Shraddha Jain The other issues are not dealt with as the same have become academic in nature. 10. In the result, the Appeal filed by the Assessee.”

7. Mr. Sawhney, has placed extensive reliance on the decision dated 21st March 2012 passed by this Court in of 2011 (CIT v. India Terminal Connector System Ltd.) where, according to Mr. Sawhney, in similar circumstances, the appeal of the Revenue was allowed and the matter was remanded to the ITAT for examination of the case on merits. He also relied upon the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-tax Officer (1993) 203 ITR 456 SC. The main thrust of the submission of Mr. Sawhney is that, as was in the case of India Terminal Connector System (supra), in the present case as well, there was specific information regarding the name of the entry provider, the date on which the entry was taken, the cheque details as well as the amount credited to the account of the Assessee. He accordingly submitted that this by itself constituted sufficient material for the AO to form an opinion that the “assessee company has introduced his own unaccounted money in its bank account by way of accommodation entries

8. Mr. Kapil Goel, learned counsel for the Assessee, placed reliance on other decisions of this Court including CIT v. Pradeep Kumar Gupta (2008) 303 ITR 95; the decision dated 27th March 2015 in W.P.(C) No. 5330 of 2014 (Krown Agro Foods Pvt. Ltd. v. ACIT); the decision dated 4th August 2015 in ITA No. 486 of 2015 (CIT v. Shri Govind Kripa Builders P.Ltd.) and the decision dated 24th August 2015 in ITA No. 226 of 2015 (CIT v. Ashian Needles Pvt. Ltd.) 9. The Court at the outset proposes to recapitulate the jurisdictional requirement for reopening of the assessment under Section 147/148 of the Act by referring to two decisions of the Supreme Court. In Chhugamal Rajpal v. SP Chaliha (1971) 79 ITR 603, the Supreme Court was dealing with a case where the AO had received certain communications from the Commissioner of Income Tax showing that the alleged creditors of the Assessee were “name- lenders and the transactions are bogus.” The AO came to the conclusion that there were reasons to believe that income of the Assessee had escaped assessment. The Supreme Court disagreed and observed that the AO “had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. He appeared to have had only a vague felling that they may be '“bogus transactions'." It was further explained by the Supreme Court that: “Before issuing a notice under S. 148, the ITO must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under S. 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of cl. (a) or cl. (b) of S. 147 are satisfied, the ITO has no jurisdiction to issue a notice under S. 148.” The Supreme Court concluded that it was not satisfied that the ITO had any material before him which could satisfy the requirements under Section 147 and therefore could not have issued notice under Section 148.

12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the AO stated: “I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has introduced its own unaccounted money in its bank account by way of above accommodation entries.” The above conclusion is unhelpful in understanding whether the AO applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the Assessee, which must have been tendered along with the return, which was filed on 14th November 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: “it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries”. In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the present case.

13. Mr. Sawhney took the Court through the order of the CIT(A) to show how the CIT (A) discussed the materials produced during the hearing of the appeal. The Court would like to observe that this is in the nature of a post mortem exercise after the event of reopening of the assessment has taken place. While the CIT may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement of law that prior to the reopening of the assessment, the AO has to, applying his mind to the materials, conclude that he has reason to believe that income of the Assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity .”

10. Furthermore, the ITAT, Delhi in the case of ITO vs. Arti Khattar reported as (2014) 41 CCH 0025 (Del-Trib) held as follows :-

“6. We have carefully considered the submissions of both the sides and perused relevant material placed before us. From a perusal of the reasons recorded, it is evident that the Assessing Officer has mentioned about some information by which the assessee is the beneficiary of an accommodation entry of `6 lakhs because some bank instrument was got prepared on 19.04.2002 of `6 lakhs in favour of the assessee presentable at Bank of Baroda, Faridabad. Now, in the reasons recorded, there is no mention about the name of the person who are the alleged entry provider. The nature of the entry i.e. in which form the assessee is alleged to be taking entries is given. The information only says that some bank instrument of `6 lakhs was got prepared. However, this information is found to be factually incorrect because in the assessment order which is passed in pursuance to notice under Section 148, the Assessing Officer has recorded the following finding:-

"During the course of assessment proceedings, it was noticed that the assessee received gifts amounting to Rs.2 lacs each from 6 persons namely Ms. Mala Khatri, Mrs. Renu Maini, Mr. Karan Sharma, Mr. Ishwar Sharma, Mr. Balvender Singh & Mr. Rajan Jassal. The assessee filed various documents relating to the donors to justify the source, capacity to pay, identification and genuineness of the transactions. From the perusal of the bank accounts of the donors, it was noticed that there was a credit entry of 2 lacs each and on the same day i.e. 19.04.2002 in all the six cases and all the donors made gifts of Rs.2 lacs each on the same day i.e. 19.04.2002 to the assessee. From the bank accounts of the donors, the capacity to made gift is not proved."

"Held, that the Assessing Officer had not examined the information received from the survey circle before recording his own satisfaction of escaped income and initiating reassessment proceedings. The Assessing Officer had thus acted only on the basis of suspicion and it could not be said that it was based on belief that the income chargeable to tax had escaped income. The Assessing Officer had to act on the basis of "reasons to believe" and not on "reasons to suspect". The Tribunal rightly concluded that the Assessing Officer had failed to incorporate the material and his satisfaction for reopening the assessment and therefore the issuance of notice under section 148 of the Act for reassessment proceedings was not valid."

8. That the CIT(A) has also allowed relief to the assessee following the above decision of Hon'ble Jurisdictional High Court. The facts of the assessee's case clearly show that the Assessing Officer had not examined the information received from Investigation Wing before recording his own satisfaction of escapement of income. Though he has mentioned in the reasons recorded that he has examined the information and details so available. Because had he examined the details and information, he would have certainly known that the information is factually incorrect and incomplete. In view of the above, in our opinion, the CIT(A) rightly followed the above decision of Hon'ble Jurisdictional High Court. Learned DR relied upon the decision of Hon'ble Delhi High Court in the case of Aditya Khanna (supra). However, the facts were quite different in the above case which would be evident from the following facts noted by Hon'ble Delhi High Court:-

"The record produced by the revenue shows that the assessee had given statements before the Special Director, Enforcement Directorate. In the statement given, the assessee stated how much was his share for introducing 6 ITA-2395/Del/2012 Masefield to Andaleeb Sehgal. He also stated that he was offered the proposal by Andaleeb Sehgal to utilize the opportunity to get some crude oil allocation from Iraq which can be brought by some company interested in the same. The assessee apparently acted on the proposal and contacted George Curmi, who was able to find Masefield, who was interested in getting the oil. George Curmi introduced the assessee and Andaleeb Sehgal to Masefield.

Indrus was a company in which Andaleeb Sehgal was interested. In the statement, the assessee had admitted his role under the oil allocations as an introducer. The statements made by the assessee before the Enforcement Directorate were before the Assessing Officer when he recorded the reasons.

Andaleeb Sehgal had also given a statement before the Enforcement Directorate. This statement was also before the Assessing Officer when he recorded the reasons. In this statement, Andaleeb Sehgal had referred to the arguments which he had with the assessee regarding Indrus not receiving any remuneration from the second oil contract. Ultimately some money appears to have been received by Indrus from Masefield as commission. Andaleeb Sehgal had asked George Curmi to transfer his share of US$ 17500 to Hamdaan India. In addition to this statement, the assessee has also made a statement before the Enforcement Directorate in which he confirmed receipt of US$ 146247 by Indrus. He also stated that the money was received as 5 per cent profit for 30 lacs barrels of oil contracted with Masefield under the 'Oil for Food Programme'. The assessee clarified in the statement that he did not do any business with Indrus outside the 'Oil for Food Programme'.

In addition to the statements made by the assessee and Andaleeb Sehgal before the Enforcement Directorate, the documents seized by the Enforcement Directorate from the premises of Andaleeb Sehgal and Hamdaan Exports were also before the Assessing Officer when he recorded the reasons. The seized documents included facsimile transmission of messages with respect to different business transactions entered into by Indrus. Some of the documents were found to have been addressed to the assessee and Andaleeb Sehgal, which according to the Assessing Officer indicated that the assessee, while being present in India, took strategic decisions from the Indian soil and rendered services on behalf of Indrus. According to 7 ITA-2395/Del/2012 the Assessing Officer, these documents established that the operations of Indrus were managed from the premises of Andaleeb Sehgal in India and since certain messages were addressed to the assessee at the address of Andaleeb Sehgal, the business connection between the assessee and Indrus was established."

9. Thus, in the above mentioned case, there was material before the Assessing Officer which enabled him to reach a prima facie conclusion with regard to the business connection of the assessee in India. Therefore, on the facts, the decision of Hon'ble Delhi High Court relied upon by the learned DR is different than the facts in the assessee's case and moreover, learned counsel for the assessee relied upon the decision of Hon'ble Jurisdictional High Court which would be binding on all the authorities working within the territorial jurisdiction of the said High Court. We, therefore, find no justification to interfere with the order of learned CIT(A). The same is sustained and ground No.1 & 2 of the Revenue's appeal are rejected.

13 Shraddha Jain 10. Ground No.3 of the Revenue's appeal is against the deletion of the addition of `12 lakhs. In our opinion, once the reopening of assessment itself has been held to be invalid, consequentially, the assessment order passed in pursuance to such notice under Section 148 would not survive. Therefore, ground No.3 of the Revenue's appeal has become infructuous and rejected as such.”

11. In the light of above prepositions, when we deeply analyse the facts of the present case then we observe that the AO merely mentioned that the name of the assessee appear in the list of beneficiaries having channelized her undisclosed income in the garb of gift. Admittedly. In the present case gift was from her paternal aunt, a close relative and the donor Smt. Sita Devi cann’t be alleged as bogus or accommodation entry provider in absence of any substantial evidence, specially when the assessee has established her identity, capacity and genuineness of the transaction of gift by furnishing bank statement of the donor, affidavit of the done (assessee) and the donor (Smt. Sita Devi) gift deed dated 23.1.2004, copy of acknowledgement and Balance sheet of Smt Sita Devi showing her capital and assets, copy of PAN card etc. The AO has not mentioned in the reasons recorded that he either examined the information or verified it from the relevant assessment record of the assessee for AY 2004-05 which clearly shows not application of mind and issuance of notice u/s 148 of the Act in a mechanical manner. Because had the AO examined the details and the alleged information, he would have certainly known that information and allegation of accommodation entry is factually incorrect and baseless. In view of above, we are inclined to hold that the AO proceeded to initiate reassessment proceedings and to issue notice u/s147/148 of the Act on the vague information without verifying and examining the same and without application of mind in a mechanical manner and hence, the AO did not assume valid jurisdiction to issue notice u/s 148 of the Act and thus notice u/s 148 of the Act and impugned necessary order passed in pursuant thereto u/s 143(3) r.w.s. 147 of the Act is not sustainable and we quashed. Accordingly, legal ground no. 1 to 1(c) of the assessee are allowed.